Egypt energy

Damietta arbitration case could be settled with gas supplies

September 12th 2018 | Egypt | Oil and gas

Event

Spain's Naturgy announced on September 3rd that a World Bank-affiliated arbitration panel had ruled that the Egyptian government must pay it compensation of US$2bn, including interest, for having stopped supplies of natural gas to a liquefied natural gas processing (LNG) plant in Damietta in which it is a major shareholder.

Analysis

According to the UK-based Financial Times, the compensation is likely to be paid in the form of future supplies of natural gas. Italy's Eni, which has a 50% stake (Naturgy owns the other 50%) in Union Fenosa Gas (UFG), the company that lodged the arbitration suit, is the largest gas producer in Egypt.

According to Naturgy, the International Centre for the Settlement of Investment Disputes (ICSID) ruled that in stopping gas supplies to the LNG plant the Egyptian authorities had not granted UFG "fair and equitable treatment", and that their actions contravened Egypt's bilateral investment protection treaty with Spain.

The 5m‑tonne/year Damietta LNG plant started up in 2005. However, as Egypt's natural gas production started to decline steeply after 2010, the government decided to prioritise gas supplies for domestic consumption, and the Damietta plant has been dormant since 2012. Its operator is Spanish Egyptian Gas (Segas), in which UFG holds 80%, with the remaining equity shared between the Egyptian Natural Gas Holding Company and the Egyptian General Petroleum Corporation. The suit was registered by ICSID in February 2014. ICSID stated that the case was closed in July 2018, but has not yet published details of the award. There was also no immediate comment from either Eni or the Egyptian government.

Settling the case with LNG shipments should not threaten Egypt's energy security. Since 2015 Egypt has covered its natural gas shortfall through importing LNG. Moreover, owing to new fields brought on stream since late 2016, including Eni's Zohr field, the largest discovery thus far in the Eastern Mediterranean, Egypt is likely to achieve self-sufficiency in natural gas within a few months. This would allow for the Damietta plant to resume operations, potentially with discounted gas supplies offset against the ICSID settlement.

Impact on the forecast

The settlement is an important development and helps end negative publicity related to this case. Our policy trends and growth forecast are unchanged, however, and we continue to forecast further oil and gas investments in Egypt, owing in part to government efforts to settle outstanding arrears and legal disputes with foreign partners.